16 June 2016Bermuda analysis

Brexit uncertainty weighs on UK economy

Uncertainty over the UK potentially exiting the European Union (EU) has already led to a reduction in internal and external investment in the UK and more disruption is likely if the UK does exit. This is what Henk Potts, director of global investment strategy at Barclays Wealth, told attendees at the Bermuda Captive Conference in a session called Global Market Outlook, which covered the major economies globally. Potts stressed that he believes re-writing trade agreements would take time and would put more pressure on an already underperforming exporting sector in the UK. “We can do our own deals but that will not happen quickly,” he warned. He added that if the UK remains in the EU he predicts the Bank of England will increase interest rates in the second quarter. If it leaves the EU, he believes sterling could weaken and it will ramp up its asset purchase programme. Ultimately, inflation could weaken, forcing interest rate rises despite weaknesses in the economy, he said. While stressing that Barclays does not take an official view on the matter, from a personal perspective he said an exit could have many unforeseen knock-on consequences. He warned an exit vote could lead to other countries questioning their membership and would also trigger another debate around Scotland’s status as part of the UK. “In addition to this, business leaders always like to stay as close to their customers as they can. The EU is the single largest market in the world and the UK has been a big beneficiary of the free movement of labour and capital. More importantly, having a seat at the table when policy is determined on things like trade and even financial services is important. We cannot afford to be out of the loop. Membership is a price worth paying,” he said. Turning his attention to other economies, he said he remains reasonably optimistic about the recovery and strength of the US economy despite a slower than anticipated recovery. He said domestic demand looks better but it is still vulnerable to global economic weaknesses. He said the Fed has backtracked on indications it would raise interest rates four times in 2016 but he now predicts it will raise them once this year and another three times in 2017. “We think the US economy is strong enough to withstand that,” he said. In contrast, he said the Eurozone recovery remains fragile and needs a lot of support still. Policymakers have been very aggressive in providing this support in the form of quantitative easing and other measures. Within this landscape, the UK economy looks relatively strong despite some concerns over manufacturing and exporters but that remains subject to any fallout from the Brexit vote.